Morning Note: Market news and an update from Diageo.

Market News

China announced a probe into Google and new tariffs on US products as Donald Trump’s 10% levies on Beijing took effect. Earlier, the president delayed tariffs on Mexico and Canada for a month. The Fed’s Austan Goolsbee said policymakers should proceed more cautiously in lowering rates with mounting uncertainty introduced by Trump. Raphael Bostic wants to wait “a while” before easing again. 10-year Treasury yields ticked up to 4.57% and gold rallied to $2,815 an ounce.

US equities moved off their early lows last night – S&P 500 (-0.8%); Nasdaq (-1.2%) – although they are currently expected to open slightly down this afternoon. In Asia this morning, equities rallied: Nikkei 225 (+0.7%); Hang Seng (2.8%). The offshore yuan slid. Chinese markets reopen tomorrow.

The FTSE 100 is currently 0.3% lower at 8,550. 10-year Gilts yield 4.52%, while Sterling trades at $1.2420 and €1.2030.

Brent Crude slipped back to $75 a barrel. Trump’s appeal to OPEC+ is aimed at taking over market share, Russia’s Deputy PM Alexander Novak said after the cartel maintained its oil-production plans.

A group of investors representing €6.6tn of assets urged the EU not to bow to pressure to scale back ESG regulations, saying planned rules are essential to help asset managers and owners identify where to allocate funds.

Source: Bloomberg

Company News

Diageo has this morning released results for the six months to 31 December 2024, the first half of its June 2025 financial year. The results were better than expected driven by a return to growth in organic net sales and a smaller margin decline than feared. As expected, the group has removed its medium-term targets and will instead provide more regular near-term guidance. Improved momentum from the last six months is expected to continue into the current six months, albeit the implementation of tariffs in the US could impact this building momentum. In response, the shares have been marked down 3% in early trading.

Diageo is a leading global drinks company, with a unique portfolio of iconic brands including Johnnie Walker, Smirnoff, Captain Morgan, Baileys, Tanqueray, and Guinness. The group is an integrated operator, producing and supplying drinks at a variety of price points across strong global distribution routes. In the long term, we believe Diageo is well placed to benefit from the trend towards premiumisation – including its 34% stake in Moet Hennessey, the group generates more than half of its sales from high margin, premium brands. The group has a strong presence in under-penetrated emerging markets, where the number of people of legal purchasing age is set to increase by over 450m over the next decade. Wealth is also increasing in these regions, with the middle class expanding and consumers shifting from local products to higher-margin premium international brands.

However, the global industry environment has been challenging of late. In addition to a rebasing of consumer spending in the aftermath of the pandemic spending boom, the sector faces potential headwinds resulting from the impact of wight-loss drugs on alcohol consumption and the request by the US Surgeon General for alcoholic drinks to carry warnings of their links to cancer. Further political risk comes from the proposed tariffs by the new Trump administration.

In response, the company is focused on strengthening the resilience of its business through operational excellence, productivity, and strategic investments to win market share. The new FD is expected to bring greater discipline on costs and a renewed focus on growth, profit, and cash.

During the half-year to 31 December 2024, reported net sales fell by 0.6% to $10.9bn, slightly better than the market forecast of $10.7bn. Organic net sales (which excludes M&A and currency impact) returned to growth, rising by 1.0%, versus the consensus forecast for a 0.4% increase. Price/mix grew by 1.2%, mainly driven by positive pricing, while organic volume fell by 0.2%. Total trade market share grew or remained stable in 65% of total net sales in measured markets, including in the US.

Growth in four of the five regions was supported by market share gains. Notably, in North America, the group’s largest market (50% of profit), Diageo outperformed the market with high quality share growth and positive organic net sales growth of 0.2%. The group is already seeing early benefits from changes in US route-to-market transformation and taking a number of actions to mitigate the impact and disruption to the business that tariffs may cause. Elsewhere, the group achieved growth in Latin America and Caribbean (LAC, +5%), Europe (+1%), and Africa (+9%), offset by a decline in Asia Pacific (-3%).

Operating profit fell by 1.2% in organic terms to $3,155m, versus the consensus forecast for a 2.2% decline. The margin fell by 69 basis points in organic terms to 29.0%, primarily due to continued investment in overheads, partially offset by reduced marketing spend and positive gross margin expansion. The decline was less than the consensus for an 80 basis points fall. Adjusted EPS fell by 9.6% to 97.7c, a touch below the consensus forecast of 99c and driven by a significantly lower Moët Hennessy contribution and unfavourable foreign exchange.

Free cash flow rose by $0.1bn to $1.7bn, well above expectations and driven by strong working capital management. Financial gearing ended the period at 3.1x net debt to EBITDA, just above the upper end of the target ratio of 2.5x-3.0x. Leverage is expected to nudge slightly higher at the full-year stage.

However, the company is committed to returning to its leverage target, in part through stronger profit delivery driven by outperformance against an improving macroeconomic environment. In the meantime, the half-year dividend has been maintained at 40c. A similar trend at the full-year stage would generate a yield of 3.5%. The company will also make appropriate and selective disposals in line with its strategy. It is already looking to sell Cîroc vodka but has quashed recent rumours that it is to offload the Guinness division or its stake on Moët Hennessy.

As expected, the group has removed its medium-term guidance – annual organic net sales growth of 5% to 7% – due to the current macroeconomic and geopolitical uncertainty in many of its key markets impacting the pace of recovery. However, management remain confident of favourable industry fundamentals and Diageo’s ability to outperform. The aim is to increase its value share of the total beverage alcohol (TBA) market from 4.7% in 2023 to 6% by 2030.

Instead in the interim, the company will provide more regular near-term guidance. Looking to the second half of the group’s financial year to June 2025 (i.e. the six months to 30 June), before the impact of the tariffs, management would have expected to build on the momentum seen in the first half and would have expected to deliver a sequential improvement in organic net sales growth compared with the first half (i.e. +1.0%). However, the implementation of tariffs in the US could impact this building momentum.

Before taking into consideration the potential impact of tariffs the group had expected a slight decline in organic operating profit in the second half of fiscal 25 compared with the prior year, broadly in line with the decline in the first half (i.e. -1.2%), reflecting higher staff costs and continued strategic investments. Clearly the implementation of tariffs could further impact this and when management can more accurately assess the impact it will update as appropriate.

Source: Bloomberg